Flywheel of Fortune

Beacon Power was just another failed recipient of a Department of Energy loan. Now it’s roaring back.

As time goes on, the controversial Department of Energy loan programs to support renewable and alternative energy look better and better. Yes, solar panel manufacturer Solyndra failed loudly. But many of the other giant wind and solar projects that received loans are performing well. Even a few of the failures have achieved some commercial success. Earlier this year, Slate reported on A123, the car battery company that qualified for a $249 million grant and promptly went kaput. Under new (Chinese) ownership, A123 retooled and developed a new line of businesses selling giant batteries to utilities. That unit was sold to Japanese giant NEC.

This cycle looks to be repeating itself with another smaller energy storage casualty of the DOE’s loan program—only this time without any Chinese money. Beacon Power went bust in 2011, about a year after taking a $43 million DOE loan. But a new American owner, changes in the market environment, and the successful operation of Beacon’s government-funded demonstration projects have created a viable company.

Founded in 1997, Beacon, based in Tyngsboro, Massachusetts, went public in 2000, raising about $50 million. Like many early stage technology companies, it primarily sold its stock rather than products and services. Over the next decade, it raised—and spent—another $114.5 million of investors’ money.

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Beacon made flywheels: spinning masses that can absorb and discharge power very quickly. The innovation was to build them out of carbon fiber instead of steel, and to make them really big, capable of storing 30 kilowatts of energy for a few seconds or minutes. Beacon’s flywheels are 6 feet tall, 3 feet in diameter, and weigh more than a ton. Operating in a vacuum chamber and suspended by magnetic bearings—the better to eliminate friction—they spin at a rate of 16,000 RPM.

If you lash a bunch of them together, they can function as mini–power plants, capable of sucking up or dishing out large amounts of electricity in periods ranging from a few seconds to 15 minutes. That’s important when you’re trying to maintain complex systems in which demand and supply change rapidly, as when everybody turns on air conditioners at the same time, or when a gusty day causes lots of wind power to surge into a system. “In milliseconds, flywheels can correct a system imbalance, whereas it might take a gas-powered generator a minute to respond,” says Barry Brits, the chief executive officer of Beacon Power. “It is a very efficient form of regulation.”

At the time of its bankruptcy, Beacon was considering building a second 20-megawatt plant in Pennsylvania.

Beacon Power built a 3-megawatt pilot plant in 2008 and was seeking to build a much larger 20-megawatt plant that would employ 200 flywheels in Stephentown, New York. Total cost: $69 million. This is where the taxpayer came in. In August 2010, Beacon sought and received a $43 million loan from the DOE’s loan program, which would fund 62.5 percent of the project.

Beacon Power managed to get the flywheels up and fully running by June 2011, and the system worked. But the company’s finances were deteriorating. Frequency regulation plants like these get paid by utilities, based in part on the prevailing price for power—which was falling steadily in 2010 and 2011. In the first nine months of 2011, Beacon managed to generate only $2 million in revenues. In October 2011, Beacon filed for bankruptcy, owing $38.8 million on the federal loan.

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But the filing represented a new stage of Beacon, not the end. Private equity firm Rockland Capital figured that the Stephentown project, already up and running, could work with the right capital structure.

Rather than simply buy the project, Rockland decided to buy the whole company. According to Scott Harlan, managing partner of Rockland Capital, growing supplies of wind power in California were making the system more unstable. Beacon’s flywheels could be a possible solution. And right when Beacon went bust, the Federal Energy Regulatory Commission put out new rules forcing grid operators to change the way they paid for such services, compensating faster-performing systems such as flywheels at a higher rate.

Rockland agreed to assume Beacon’s debts and pay several million dollars in cash to take over the company. As part of the deal, as often happens during bankruptcy, the DOE agreed to write down the loan balance from $39.7 million to $25 million. In March 2012, Rockland formally took control of Beacon, installed power industry veteran Brits as CEO, and rehired most of Beacon’s employees. Then they began to invest. At the time of its bankruptcy, Beacon was considering building a second 20-megawatt plant, this time in Pennsylvania. Beacon had already line up a $24 million DOE Smart Grid grant—not a loan—and another $5 million grant from the state of Pennsylvania. Combined, those would cover about half the cost. Rockland Capital, the new owner, provided another $30 million to build the facility in Hazle Township; the plant went into full operation last week, doubling the size of Beacon’s systems.

As often happens, experience building demonstration projects has helped Beacon Power figure out how to build more quickly and cheaply. “The next plant we build will have the same amount of capacity and level of performance at about 50 percent of the cost,” says Brits. Now, the company is aggressively seeking new contracts. Brits told Bloomberg that Beacon expects to double the size of its operating plants by the end of 2015, and that it could add up to 100 megawatts of capacity in 2016. Its payroll has risen from about 35 at the time of bankruptcy to about 60 people today. And it’s current on the DOE loan, which means taxpayers are likely to get $25 million of the money they lent to the company, with interest.

More significantly, after building out two demonstration projects with a significant assist from the public, Beacon Power now believes it can build future projects on its own. “There was no way we could have built those without government support,” says Rockland’s Scott Harlan. “But it’s very conceivable that we could now.”